Iirc DVD subtitles are actually a pre-rendered overlay stream. YUV (with uv subsampling) works great for pictures, not so much for text (and has only ever the original DVD resolution and hence fails at upscaling). VLC does indeed grab subtitles from the text and renders them crispy in the screen resolution.
It was my understanding that the difference between closed captions and subtitles was a semantic one--closed captions are for the hearing impaired and subtitles are for people that can hear but don't know the language.
So closed captions have stuff like "door opens, a radio is playing an old tune in the background. Sheila: Hello" but with subtitles you'd just see "Hello" since if you can hear then you can infer everything else about the scene.
There are sort of two different definitions at work here - the semantic definition which is as you describe, and then there's the technical definition which has to do with the implementation.
"Subtitles" on a DVD are basically a 4-colour (3 + transparent) bitmap which is overlaid on the video stream. But DVDs also support the closed-captioning that was originally used for TV broadcasts, which is text embedded in the video signal that's decoded and displayed by the television set itself.
Media playing software can extract subtitles from the latter system and display them in whatever font you like - but you can't do the same with the DVD-overlay subtitles, because they're just images.
