Then why did they allow someone else to create an email like mine without the dot and I even get the occasional mail addressed to them. This is really shady, specially for an important service like email.
I think you are assuming someone else should have created that email address without the dot because you are getting emails addressed to someone else.
The reality is it is more likely that someone who hasn't created that email is using it as their address because they don't really understand how email and email addresses work
They didn't. You get email because somebody either typo's their similar address or they simply think that's their address when it isn't.
Not sure, I contacted this person, since I got their phone number from one of their emails (e.g. they registered for a hotel). I specifically asked them if they made a typo, according to them they have been using this email for years (maybe they lied but why would they).
This is inconclusive test, and if you ask people whether they made a mistake in the signup, they will likely answer no. Try to send a mail to that account, and if you receive a reply that is a real test.
Either that email address sends mail to your inbox or theirs - there's no way it could be some mix of the two.
They might have just been using it in terms of giving it out as theirs for years. Doesn't mean they've ever had access. Or they could have typoed it a long time ago and now actually think that that they've logged in with it when they never have.
They aren't lying, just confused. They probably made a hotmail.com account and assumed it would work with gmail.com.