In International English there are two uses of the word sir and a third use in Hong Kong English. The word sir is an old variant of sire. The word sire literally means father and was used symbolically to refer to a lord or king as being like one's father.
The word sir is used instead of the name of a man, to whom one should show respect. For example: May I help you, sir? / Yes sir This use is common for a military officer, teacher or employer. This use is not capitalised, because it is being used instead of a name, but not as a name or part of a name. (The female equivalent is madam or ma'am for short.)
The word sir is also used to show that a person has a knighthood1. Naturally this usage is more common in British English. Titles, such as the word Sir are used as a part of the person's name and is capitalised for this use. (The female equivalent is Dame.)
A holder of a knighthood should properly be addressed as Sir Donald or more formally as Sir Donald Tsang, but never Sir Tsang. The honour is not inherited so only Donald, not the family Tsang receives the title. Sir Donald was convicted on a misconduct charge. Knighthoods are taken back if the person has committed a serious crime. It remains to be seen if the British Crown will revoke his knighthood.
Sometimes Americans are given an honorary knighthood. America is a republic that does not allow royal or noble titles. So Americans will still be addressed as Mr, Mrs. &c. even if they are given an honorary knighthood.
In Hong Kong the word sir is used to show respect, just like in International English. However in Hong Kong the word order is reversed and capitalised. It is used with the name. So in Hong Kong a school principal might be referred to as Tom Sir, instead of Sir Tom2. This use would be strange elsewhere. No British knighthood is required, just a general position of authority. All forms of the word sir show respect, but the usage is different.
2. In Hong Kong English people say Tom Sir or Chan Sir. It does not matter if it is an individual name or a surname. However people usually do not say Ada Madam nor Chan Madam. For women the usual English order is followed, as in Madam Chan or Madam Ada.