Correct me if I am wrong, but it actually sounds like your problem is that the subtitles are hardcoded into the avi(i.e. already present on the avi and not as a seperate stream). If this is true, then nothing can be done to toggle the subtitles on the DVD output as the subtitles will be present as hardcoded on the DVD picture.
Even if they are not hardcoded on the avi when converting from one format to another it is always advisable to process the subs seperately as the frame rates change during the system conversion and so does the frame rate of the subs(otherwise they will appear out of sync with the conversation) and check the sub stream for sync probs with Vobsub and then use this stream to author the final DVD. Then you can toggle the sub stream as you want.
Hope this helps.