There are quite a few questions & answers about hacking around the limitation of C# not allowing method return (and argument) types to be changed to compatible types on overrides, but why does this limitation exist, either in the C# compiler or in the CLR? As I an see, there is nothing that could break if co/contra-variance was allowed, so what is the reasoning behind it?
A similar question could be asked for widening access parameters - eg overriding a protected internal method with a public method (something which Java supports, IIRC)
This answer is not talking about C#, but it helped me understand the issues better and maybe it will help others: Why is there no parameter contra-variance for overriding?
Eric Lippert already answered this way better than I could.
Check out his series on Covariance and Contravariance in C#
and
How does C# 4.0 Generic Covariance & Contra-variance Implmeneted?
EDIT: Eric pointed out that he doesn't talk about return type convariance but I decided to keep the link in this answer because it is a cool series of articles and someone might find it useful if looking up this topic.
This feature has been requested and almost 5 years ago Microsoft has responded with "Thanks for logging this. We hear this request a lot. We'll consider it for the next release."
And now I'll quote Jon Skeet because it would not be a proper answer on StackOverflow without an answer by Jon Skeet. Covariance and void return types
To expand on Joel's answer - the CLR has supported limited variance for a long time, but the C# compiler doesn't use them until 4.0 with the new "in" and "out" modifiers on generic interfaces and delegates. The reasons are complicated, and I would get into a mess trying to explain, but it isn't as simple as it seems.
Re making a "protected internal" method into a "public" method; you can do this with method hiding:
(as long as the arguments etc are all also public) - any use?
It does, you just have to wait for VS2010/.Net 4.0.
Seams introducing covariance of return value has no essential drawback as Java and C++ have used. However, there's real confusion cased by introducing contra-variance of formal parameter. I think this answer https://stackoverflow.com/a/3010614/1443505 in C++ is also valid for C#.